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November 6, 2020
Republic Services announced its Q3 2020 results and gave investors an optimistic look into 2021.
CEO Don Slager lauded the company’s strong performance, saying, “we are extremely pleased with our third quarter results, which clearly demonstrate the strength and resiliency of our business. The Republic team is working hard every day delivering quality service to our customers and communities. Our deep expertise and dedication, together with the strength of our market position and assets made these results possible.”
During the quarter, Republic achieved adjusted earnings per share of $1, an 11% increase year over year (YOY). Substantial results along with effective cash management helped Republic reach $1.1 billion of adjusted free cash flow throughout Q3, or 14% growth from Q3 2019.
Slager reported the company continues to drive shareholder value through mergers and acquisitions, dividend distributions and a $2 billion, three-year share repurchase authorization which will begin in January 2021.
“We believe investing our free cash flow in quality acquisitions is the best way to increase long term shareholder value,” he said. “We continue to prioritize acquisition opportunities to further strengthen our leading market positions and expand into new markets with attractive growth profiles.”
Republic has completed $154 million in acquisitions as of the end of Q3. Total acquisitions are expected to reach between $850 million and $900 million for the year. With a “robust” acquisition pipeline, Slager expects 2021 to be another strong year of activity. Year to date, the company as returned nearly $500 million through dividends and share repurchases.
“As we look forward, we remain optimistic about our business and continued prospects for profitable growth,” he said. “Pricing continues to exceed cost inflation; volumes continue to recover and margins are expanding.”
As a result of the company’s performance, Republic is raising its full-year 2020 adjusted free cash flow guidance to $1.2 billion, up from $1.15 billion. Adjusted EPS guidance was reinstated as the company projects to reach an adjusted earnings per share between $3.37 and $3.40 for 2020.
Jon Vander Ark, Republic president, reported on the company’s container volumes.
Overall volumes decreased by 3.4% in Q3, a positive outcome compared to the 7.4% decrease in Q2 2020. All lines of business showed improvements, demonstrating an economic rebound.
“We continue to see most of the volume decline concentrated to customers in the education, hospitality and restaurant businesses,” Vander Ark said. “However, we continue to see positive signs in our customer base, including small container customers.”
Third quarter small container volume decreased by 4.8% in Q3 but was consistent. Customers that decreased the level of service at the beginning of the pandemic have largely returned, with only 1% of Republic’s small container customer base still out of the equation.
Large container volume fell 5.4% but was “relatively consistent between the permanent and temporary portions of this business.”
Vander Ark commented on total landfill volume, saying it decreased 3.1% versus the prior year.
“This included an increase of 3.3% MSW volume, which is offset by a decrease of 2.5% in CMD volume and a decrease of 11.7% in special waste volume,” he said. “And a decrease in special waste volume was due to jobs being deferred not canceled and the pipeline remains strong.”
CFO Brian DelGhiaccio rounded out the earnings call and noted that adjusted EBITDA margin expanded 230 basis points to 30.3% in the third quarter.
He said, “the components of margin expansion included 70 basis points of improvement from favorable net fuel and higher recycled commodity prices, and 160 basis points of improvement from the underlying business. Margin expansion in the underlying business was broad-based, and nearly all operating expenses improved compared to the prior year.”
Although specific EBITDA margin guidance was not suggested, Republic has a 50-basis point headwind in Q4 due to the timing of compressed natural gas (CNG) tax credits. The company estimates the EBITDA margin to be at or above fourth quarter 2019 performance.
“This would result in full-year margin expansion and exceed our original full-year EBITDA margin guidance that we provided back in February,” DelGhiaccio said.
Additional Q3 2020 highlights:
Year-to-date cash provided by operating activities was $1.909 million, an increase of 6.8% versus the prior year. Adjusted free cash flow, a non-GAAP measure, for the same period was $1.109 million, an increase of 13.8% versus YOY. The increase in adjusted free cash flow was primarily due to growth in EBITDA and improvements in working capital.
Third quarter core price increased revenue by 4.5%, which consisted of 5.4% in the open market and 3.2% in the restricted portion of the business.
Third quarter average yield was 2.6%.
Third quarter adjusted EBITDA, a non-GAAP measure, was $781 million, an increase of $41 million from the prior year.
Third quarter adjusted EBITDA margin was 30.3% of revenue and increased 230 basis points over the prior year. This included a 70-basis point benefit from higher recycled commodity prices and lower fuel costs.
Republic continued to convert CPI-based contracts to more favorable pricing mechanisms for the annual price adjustment. It now has approximately $855 million in annual revenue, or 34% of its approximately $2.5 billion CPI-based book of business, tied to a waste-related index or a fixed-rate increase of 3% or greater.
The company's average recycled commodity price per ton sold in the third quarter was $99. This represents an increase of $27 per ton YOY.
Republic also was certified as a Great Place to Work® for the fourth consecutive year.
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